Many contracts contain what is known as a “force majeure clause” (more about these clauses available here: COVID-19: Businesses should review Force Majeure clauses and take action to preserve rights and limit liability).
But what do you do if your contract does not have a force majeure clause and one party wants to avoid further contractual performance?
In Ontario, the equitable doctrine of frustration may apply to relieve a party from further contractual obligations. Frustration applies where, without the fault of any party, an unforeseen event arises for which the parties made no express or implied provision in the contract and which makes the performance of the contract ‘radically different’ from that which was originally contemplated. In such circumstances, a party may be relieved of further performance of their contractual obligations.
Frustration does not operate, however, if contractual performance that one party is looking to avoid would be unreasonably harsh, onerous or difficult in the new circumstances. Rather, the performance must be impossible, impractical or ‘substantively different’ than what the parties originally bargained for (see the recent decision of Bang v. Sebastian, 2018 ONSC 6226).
The onus is on the party looking to avoid further performance to prove frustration.
If a contract is frustrated, the effect is that the parties are relieved from further obligations to perform commencing from the time of the frustrating event. Money already paid under a contract (i.e. a deposit) may be recovered, provided that the money paid does not relate to part-performance and provided that no contrary intention appears in the contract as to the effect of frustration. As well, in Ontario, regard must be had to the Frustrated Contracts Act, which sets out a framework for courts to adjust rights and obligations where a contract has been found frustrated.
Frustration has been applied in many contexts, including where there has been an intervening change in the law that renders it illegal to perform a contract in accordance with its terms. Given the current COVID-19 crisis and the emergency changes to the law that have accompanied it, many clients have been asking if they (or their counterparty) can rely on the doctrine of frustration to avoid further contractual performance.
The answer is….That depends.
The doctrine of frustration is a flexible doctrine that is highly fact dependent. It is not restrictive to any formula and has been applied to all types of contracts, most notably the sale or leasing of land, the sale of goods/services and in contracts for employment. Each case will turn on its own unique facts and circumstances.
In the COVID-19 context, it should be noted that if the problem is one of mere delay in performance, the duration of the delay and the terms of the contract will be important in assessing if the contract is frustrated or not. The more that time is of the essence in the contract and the longer the COVID-19 crisis drags on, the more likely it may be that a contract has been frustrated.
If you believe you are party to a frustrated contract stemming from the COVID-19 crisis, speak to your lawyer about your circumstances to determine whether or not frustration applies in your case.